Sunday, January 12, 2014

Breaking up large corporations - Israel takes the lead

At a time when big corporations are being perceived as a threat to market stability as well as contributing to widening inequality, and there have been increasing public support for breaking them up, the Israeli Knesset has voted to do exactly that.

A popular movement against the sharp spurt in concentration of wealth, spearheaded by the newspaper Haaretz among others, has now culminated in the decision to break-up the country's massive pyramids - an interlocking ownership pattern whereby an individual or family which owns a public company controls several other companies. As the Times writes,

Public shareholders often lost out as the tycoons used them to subsidize their collection of businesses. The tycoons could put down little money but control vast swathes of the Israeli economy. These pyramids also used their size to crowd out competitors and take on excessive debt by lending among their companies. The Israeli economy was viewed by some to be uncompetitive because the concentration of businesses arguably drove up prices and decreased competition. In the small Israeli economy, the pyramids were behemoths that some termed too big to fail... In other words, with a single bill and a few big changes in its corporate law, Israel is looking to overhaul its economy and hopefully reduce income inequality.

The decision follows the recommendations of a ten member committee of government regulators, the concentration committee, which examined the adverse effects of pyramids on the economy. Apart from recommending the breakup of pyramids, the committee also advocated the prohibition of significant cross-holdings between financial and non-financial groups. This would ensure that financial institutions will not bring down entire firms when they collapse. Interestingly, the conservative government has supported the proposal.